Credit Card Settlement Rules

Falling behind on your credit card bills and getting collection calls at home is not a pleasant experience. There are ways to eliminate those phone calls and possibly protect your credit score at the same time. Contact the credit card company directly or hire a debt settlement attorney to work for you. In these negotiations, a settlement can be reached with the credit card company to reduce the total amount owed.

Know the Priorities

Create a list prioritizing bills and expenses. Include monthly expenses for each category. Deduct these expenses from monthly income. What is left is the maximum amount you can afford to pay monthly settlement payments. Only offer half of this at the most, as you will want to have some money as a safety blanket in case unexpected expenses arise.

Prepare to Pay Taxes

When making a credit card settlement, the credit card company provides a bill due for payment, less the amount forgiven. A potential payment on the amount "forgiven" may be owed to the IRS when calculating annual taxes. The reason for this is the amount of money written off by the credit card company is reported as "income earned" by the credit card company to the IRS under your social security number. Depending on other tax situations, this could result in additional money owed when income tax returns are filed.

Avoid Damaging Reports on Credit

Negotiate to have your credit card account reported as "paid in full" to reduce the damage to your credit score when settling instead of being listed as "settled for less than the amount owed." Secondly, request the credit card company to remove any negative reports it has made about your credit. The credit card company is not required to do these by law, but if you play hardball and negotiate this as part of the agreement it can reduce the damage to your credit score.

Settlement Document

Request a settlement document from the credit card company that specifically lists all the terms agreed to between you and the credit card company. It is imperative to get everything in writing regarding your credit card settlement. Do not make a payment until you have a written copy of the settlement in your hands. If you fail to get a written agreement, if something goes awry, it's your word against the credit card company's word. This settlement document will serve as evidence if the credit card company still attempts to collect the entire amount by taking you to court.